The Problem of Late Payment

Author

Date

12th June 201517th May 2016

[avatar]

Late payment is one of the greatest challenges faced by this country’s small businesses. Not only does it limit their ability to grow by choking their cash flows, it also causes employees to waste time chasing payment which could otherwise be spent more productively.

The government knows this, and changes to late payment legislation stand as the latest addition to their basket of policies aimed at easing the burden shouldered by small businesses. Their objectives here are commendable, but as I wrote recently when discussing their efforts to tackle red tape, getting cold hard results may prove difficult.

The ‘Prompt Payment Code’ set up by the government seven years ago has certainly not had the desired effect. Signing up to this voluntary measure means that a business is bound to certain payment terms, but, somewhat predictably, only 1,700 businesses have got involved. More recently, the EU launched their Directive on Late Payment in an attempt to instigate a 60 day payment window. But a loophole allowing longer payment terms if the supplier agrees has hamstrung this policy’s potential. Food giant Mars have reportedly capitalised on this loophole, increasing their payment terms from 60 to 100 days and using their market power to coerce suppliers into agreeing, or facing the possibility of losing contracts.

There are legal options available to the victims of late payment; businesses can charge interest to their debtors, for instance, but only 10 per cent of SMEs are reported to have used this for fear of losing business. With the IT Firm Sage estimating that some £55bn is currently owed to the UK’s SMEs, there is clearly a need for a more workable solution.

The government’s newest initiative is named the Small Business Conciliation Service and uses an Australian model as its precedent. The Service will be used to mediate disputes between debtors and creditors and thus smooth the payment process.

Yet even if this Service becomes a tremendous success, late payment will not disappear overnight. And as Professor Nick Wilson of Leeds University Business School points out, at the moment “[SMEs] have insufficient capital to cope with bad debts and late payment. We need greater bank lending and equity investment.”

But as we know, the banks aren’t lending. So where should SMEs look? For many businesses, the burgeoning alternative finance sector could be the answer.

Are the EU listening on Red Tape?

Author

Angus Dent

Date

22nd May 201517th May 2016

[avatar]

Two weeks ago, I wrote about the new government’s pledge to purge £10bn of legal red tape by 2020 to benefit the nation’s businesses. I stated here my belief that whilst this is unquestionably a target worth aiming for, the efficacy of the initiative – spearheaded by the new business secretary Savid Javid – will likely be stymied by the actions of EU lawmakers. But in the past few days, some very interesting articles have been published detailing the EU’s response to long-standing allegations of meddling and the overregulation of markets, as well as the business response to the Conservative pledges.

On the whole, it seems that UK businesses have acknowledged the worth of the £10bn target but, as the FT reports, this is “tempered with a healthy dose of skepticism.” As was noted in the earlier blog, many thought the “bonfire of red tape” promised by the 2010 government failed to materialise, and have interpreted this as part of a larger trend of government inaction. The Director-General of the British Chambers of Commerce, for example, has warned that “every government [since Thatcher] has said they will cut or limit regulation and has signally failed to do it.” The views of such an eminent figure will undoubtedly be reflected more broadly across industry. And with the regulatory policy committee finding that net savings achieved through the coalition’s cutting of regulations from 2010 – 2015 were smaller than the costs imposed by new EU regulation in just 2013, they can clearly support this viewpoint too.

It should come as some relief to red tape skeptics then to hear that the EU has realised this cannot continue. Frans Timmermans, the Dutch Vice-President of the EU Commission, is the man that has been tasked by Jean-Claude Juncker with cutting down on the EU’s flabby regulatory framework. Seen by many political commentators as sympathetic to British concerns on regulation, Timmermans has now set out the EU’s “Better Regulation” programme which will implement the desired changes. So what exactly will this initiative entail? Some may be disappointed to hear that unlike the UK government the EU Commission has not put a quantitative target on the reforms, explaining somewhat loosely in a Q&A that it means “doing different things, and also doing them better.” But despite the lack of hard targets, it has been reported that Timmermans has ruled that only 23 laws will be proposed this year, down from a recent annual average of 130.

With David Cameron already crediting the Dutchman’s plans as a “significant step in the right direction”, we must hope that this news will be heeded by the nation’s Eurosceptic lobby.

Are SMEs better off in or out of the European Union?

Author

Angus Dent

Date

14th May 201517th May 2016

[avatar]

Three days after being appointed the new Conservative Business Secretary, Sajid Javid is already weathering a storm of media attention. Commentators have been pushing him hard in an attempt to tease out his plans for the next five years, and a key talking point to emerge from this scrutiny surrounds the tentative response he gave when questioned on Britain’s future within the EU. Mr Javid justified his evasiveness by saying he could give no firm answer on the issue of the UK’s membership until “we know the outcome of the renegotiation process.”

So the Business Secretary is holding his cards close to his chest on Europe for now. But even if the renegotiation process were to fail, would leaving the EU be a good deal for Britain and for business? The four million votes garnered by UKIP and their pint-swilling leader would seem to suggest many think so. They cite, amongst other things, the ability the UK would gain to regulate immigration from the European Union, make trade deals of its own volition, and disentangle the EU’s mass of bureaucratic processes as reasons to break with the organization.

These arguments are are specious. EU immigration has been shown to make a net economic contribution to the UK, any ability to broker our own trade deals would be offset by the loss of huge EU-led trade deals such as the Transatlantic Trade and Investment Partnership (TTIP), and striking deals with EU members from outside may well require regulation to be put back in place.

Furthermore, it is clear that powers abroad do not wish to see a “Brexit”. A guest column in The Telegraph written by a Norwegian minister warned of the angst caused by “not being at the table when policies… critical to our own security are determined.” And worrying noises have also emerged from the US and Japan, both of whom have stated that many of their companies based themselves in the UK primarily to be able to gain access to Europe.

Despite this noise from abroad, though, there has been an increase in the number of small businesses considering leaving the EU. In 2014 the Quoted Companies alliance found 4% favoured withdrawing; a poll this month by Zurich has found that that number has risen to a third. With almost 90% of SMEs that sell to foreign markets trading with EU members, this rise would seem inexplicable – exports would not vanish in case of an exit, but tariffs and duties might well be levied. Indeed, a recent report from the LSE has modelled the effects of a Brexit and found negative economic welfare results in both optimistic and pessimistic scenarios. “Reduced integration with EU countries is likely to cost the UK economy far more than is gained from lower contributions to the EU budget,” they concluded.

With David Cameron now likely to bring the referendum forward to 2016, we must hope that clearer heads will prevail.